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business newsLong Side Opportunities for When Strength Returns to Tape
On overall weakness, don't put additional capital to work on the long side. However, be sure you're prepared with a list of attractive patterns -- like Capital One and Adobe -- for when strength returns.
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Capital One Financial (COF) has found a niche in the credit industry. Sure their commercials are always a bit on the quirky side, but that may have more to do with my sense of humor than anything. “What’s in Your Wallet?” is a tag line that the majority of consumers will readily recognize.
I find myself attracted to COF because of the recent support it has received at key areas. In March, $47.80 became a very discernible area where buyers appeared to step in. And then just a week later, COF bounce crisply off of its 50-day moving average. During the recent weakness, COF is once again trading close to this rising support level. I will be watching very closely to see if institutions step in around the $50.70 level and prop COF up.
With earnings right around the corner (April 21), I will not be a buyer before its announcement. Sure, I take the chance of missing a nice pop on the number, but I am also cognizant of the downside and will just wait for the action to die back down. If COF turns in a solid quarter and holds support at the rising 50-day moving average, it goes to the head of the class.
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I am not as partial to the Adobe (ADBE) chart as I am to COF, but I still see the diamond in the rough with this name. ADBE has been tracing lower highs since the February top. This should be seen as a warning signal until the direction can be changed. As noted on the chart, the most recent pivot high is in the $34.70 area. Under no circumstances would I try to game this and be an anticipatory buyer.
What attracts me to the ADBE chart is how it has settled back into congestion around the $34.00 level. This takes in price for all of 2011, and ADBE has seemed to oscillate back and forth settling each time back into this range. With a 50-day moving average starting to turn slightly up, I will watch for ADBE to break out above $34.70. I would place a stop below the recent congestion and the 50 day, which would be around $33.70.
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Over the past month, retail names have been on a tear, with the SPDR S&P Retail ETF (XRT) advancing over 10% off its March 2011 lows. In recent days however, there has been some selling coming into the sector. To that end, I started to look for names holding up well against the grain of this selling. Ross Stores (ROST) caught my eye as it bounced off the 50-day moving average. If a trader pulls back a weekly chart of ROST, it has nearly tripled off its late 2008 bottom.
Since trading decisions must be made based on current observations, I like the odds of ROST continuing its run. Because my read is based off of a daily chart, and I am looking for it to take out recent highs around $73.25, I am watching ROST at the current levels. A stop below the pivot low of $69.89 is reasonable, and when ROST takes out the $72.00 level a partial trade could be initiated. Once ROST is above $73.25, the second portion of the trade should be taken.
On overall weakness like we are seeing today, I clearly am not putting additional capital to work on the long side. But behind the scenes my watch list continues to grow, and when the next wave higher launches, I will have a fresh batch of leaders firing off alerts. Whether you watch the names I am suggesting above or not, make sure you are prepared with a list of attractive patterns. When the target price fires, it is much easier to pull the trigger with the leg work already out of the way.
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